He explains: “Consequently, a transparent and robust discount management policy is increasingly seen as an important feature to any new investment trust initial public offering.
“Many new listings, including Mobius Investment Trust, not only offer a recurring redemption facility at NAV (after an agreed number of years) but also actively re-purchase shares once a certain discount threshold is breached.
“Combined, these mechanisms have proven successful at discouraging short-term investors from sitting on the share register and entrenching a discount."
While David Cornell, chief investment officer at Ocean Dial Asset Management, which runs the India Capital Growth fund, says when the stock trades at a discount, investors get an opportunity to make much more than in an open-ended fund.
He suggests: “There are advantages to playing the discount in the investment trust world, because if you get discount narrowing and the asset value rising then you get a much better return.
“Clearly, that works in reverse when the discount widens and then asset value falls.”
Investment trusts also have the ability to issue new shares at close to NAV to ensure the premium does not rise too far, points out Matthew Burrows, chartered financial analyst and director of distribution at Frostrow Capital.
While gearing is not the sole driver of, but can affect, discount volatility, Mr Burrows suggests good investment performance, active marketing and measures in place to control the discount and premium, should all result in demand for shares and lower discount volatility.
However, he admits “these are attributes of surprisingly few investment companies”.
Nevertheless, he says that instead of being considered negative, discounts caused by factors beyond the control of portfolio managers could be viewed as a window of opportunity.
He adds: “This favours those beady-eyed investors who are canny enough to spot a temporary anomaly that can be exploited.
“So, don’t fear it, exploit it.”
Gearing in practice
Another unique feature of investments trusts is their ability to borrow money in order to finance further portfolio investments, explains Mike Wilson, head of sales at Janus Henderson Investors.
He explains: “The process is known as 'gearing up' and essentially affords portfolio managers the luxury of taking a longer-term view; [to] enhance income and capital returns in rising markets and to act quickly on attractive valuations without needing to sell any existing positions to raise funds.”
“The hope is that, in the long run, the result produces better returns for investors in investment trusts versus those in open-ended funds,” adds Mr Burrows.
